The Code of Banking Practice: No [release of] guarantees

With the new Code of Banking Practice to come into effect on 1 July 2019, the Victorian Supreme Court case of Commonwealth Bank Australia v Glen William Hames Ruthven [2018] VSC 365 is a timely reminder of the degree to which consumers and the community continue to look to the Code as a tool to resist enforcement action by banks, and how the boundaries of the Code's reach are being continuously tested.

The facts of the case are largely unremarkable.  Lindon Financial Group Pty Ltd borrowed $400,000 from CBA in November 2015.  CBA took security over all Lindon's assets and the loan was supported by guarantees from the directors of Lindon, including Ruthven.

In mid-2016, Philip Webb and Stuart Rogers, two of the directors and guarantors, exited the company.  As a result, Ruthven was the sole remaining director and secretary.  The plan was that another director, James Russo, was to be elected and guarantee the existing loan.   Ruthven signed a Customer Authority to Release Security Documents (Release Authority), requesting CBA to release the former directors from their obligations under the guarantees.  The release was accepted by CBA.  However, Russo's directorship did not go ahead and his personal guarantee was never executed, leaving Ruthven as sole guarantor.

In April 2017, Lindon went into administration and subsequently, liquidation.  Seeking payment of the outstanding loan amount, CBA gave written notice to Ruthven, now the sole guarantor, demanding payment in full.

Ruthven did not dispute his liability under the guarantee.  However, he resisted summary judgment for payment under the guarantee on the following grounds:

• although CBA was not bound to sue all guarantors, prior to giving the Release Authority, Ruthven had an equitable right to claim contribution from Webb and Rogers;
• it is an implied term of the Code that CBA is under an obligation to give a prominent notice that the guarantor should seek legal advice where signing a Release Authority that could disentitle him from claiming contribution from the other guarantors (Implied Term);
• there was an assumption that the Release Authority would not be acted on until a replacement guarantee was executed (Assumption); and
• it is therefore unconscionable for CBA to enforce the personal guarantee in circumstances where CBA breached the Implied Term and acted contrary to the Assumption.

In rejecting Ruthven's arguments and ordering summary enforcement of the guarantee, Associate Justice Mukhtar reinforced the ambit of the Code as voluntary and not all-encompassing.

It is important to understand the breadth and context in which the Code operates.  The Code prescribes a range of standards and obligations on banks in certain circumstances.  One of these circumstances concerns what a bank must do prior to obtaining a guarantee.  Clause 31 of the Code requires that before taking a guarantee, the bank must give a prominent notice that, amongst other things, the guarantor should obtain independent legal and financial advice.  Notably, the Code is silent on releasing a guarantor and contribution between co-guarantors.

The Court found that there was no Implied Term in the Code, ruling the argument "untenable" and refusing to "write in provisions on a distinct subject matter that is patently not within its existing clauses".  Helpfully, Associate Justice Mukhtar also explained that he was not inferring that there is a gap in the Code, but rather, that it was the drafter's deliberate intention to omit the subject of release of guarantors which is not "a matter for voluntary codification by banks", but a matter to be determined by terms of the guarantee or the operation of law.

On whether CBA acted unconscionably, the Court demonstrated that despite the current climate and in the absence of evidence, it will not entertain "unarticulated" allegations of "exploitative conduct or unfair practice" on the part of the bank.  Rather, the Court found that CBA granted the release at the request of Ruthven and his colleagues who were "trying to bring about a commercial resolution".  It was held that CBA did not induce or affirm the Assumption, and, to the contrary, there was no evidence that CBA was even aware of the Assumption.  Pointing out the obvious, Associate Justice Mukhtar stated that CBA "did not gain by the release of the other guarantors".

As the Code undergoes a facelift, it is clear that the community and consumers continue to rely on and hold up the Code as a shield against enforcement action by banks.  Although this is a promising decision by the Victorian Supreme Court, this case should serve as a warning to banks of what is to come and a caution to be prepared to face more scrutiny over adherence and practical adoption of the Code.